Sharing More Pension Data with Investors

Public employers will think twice about future benefit increases if laws require more disclosure.

Girard Miller is the Public Money columnist for GOVERNING and a senior strategist at the PFM Group.

Public pension funds and their liabilities aren’t only topping the agenda for state and local budget makers. The U.S. Securities and Exchange Commission (SEC) has also taken a keen interest in them. Last year, New Jersey officials faced an SEC enforcement action over failure to provide sufficient disclosure regarding their pension funding. That’s the kind of hot water governments borrowing money in the municipal bond market can get into if they fail to disclose their retirement obligations and the claims these plans make on future revenues.

One solution would be for the Governmental Accounting Standards Board (GASB) to require enhanced disclosure in the notes to financial statements or the supplemental schedules provided in the back of annual reports. Another approach would be to require that issuers include the needed information in official statements and annual filings with EMMA, or Electronic Municipal Market Access -- the muni bond industry’s data repository.

To their great credit, the National Association of Bond Lawyers (NABL) has issued a discussion draft of disclosure guidelines that would provide forward-looking projections of vital actuarial information for defined-benefit pension plans. NABL starts with 10-year historical data and adds a 10-year table showing projected actuarially required contributions, unfunded accrued actuarial liabilities and the funding ratio of the plan each future year. Conceptually, this schedule has properties similar to standard accounting disclosures of capital lease obligations: It alerts the bond investor to competing claims.

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These guidelines move the ball downfield. I would add: Require 15-year projections for employers that are not funding their full actuarial contributions and, if current policies are not changed, require additional projections of the expected contribution rates and remaining unfunded liabilities at the end of 15 and 20 years. The same standards should apply to other post-employment benefits plans for retiree medical benefits and compel similar long-term projections of the consequences of pay-as-you-go financing. With this kind of information, bond investors could make rational decisions in light of the competing claims on future resources that will inevitably arise if these systems continue with unsustainable funding practices.

Some actuaries will object to the NABL approach, saying it focuses on point-estimates -- when a range of outcomes is natural -- while making probabilistic long-term projections. That’s a fair argument, and the NABL might consider an approach that shows companion projections based on alternative standardized assumptions. With new GASB accounting standards expected next year, an alternative forecast using GASB-based calculations would provide valuable alternative projections. This would be especially helpful if plans would fully adhere to GASB’s concept that unfunded liabilities should be amortized over employees’ remaining careers so we fully fund their benefits before they retire. A forecast using the controversial “risk-free” rate of government bond yields might also be helpful, which would provide a worst-case perspective (even though some consider that extreme). For a more optimistic forecast, a discount rate based on historical 20- or 30-year returns could be used.

I’d like to see an independent organization take on the job of issuing guidelines on matters like this. This is especially needed once GASB issues its new pension accounting standards.

Of course, this data will come at a modest additional cost. The pension funds and employers will bear the cost of this data mining -- even though the immediate financial benefit of this exercise is arguably for the bond investor. In the long run, however, taxpayers and retirees will benefit from the clear new light that this information sheds on the true long-term costs of retirement benefits and the obligations that employers incur when they increase those benefits. Public employers will be more likely to think twice about future benefits increases if laws and policies require this kind of information before decision-makers vote.